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Secured Transactions
John Marshall Law School, Chicago
Kilborn, Jason J.

Secured Trxns

Kilborn

Spring 2011

Overarching principles:

· Cts don’t like fixing grantors’ mistakes

· No magic words are necessary to create SI

o Policy – form should not prevail over substance, and whenever possible, effect should be given to pps’ intent.

· The law favors relatively sophisticated pps who engage in these trxns repeatedly, at expense of ppl who stumble occasionally into system in which “everybody” knows things they do not (i.e. possession-gives-notice theory)

· Security agreements are often interpreted more literally than in accord w/intention of the pps bc this is a K that binds third pps not in the K

· Still pay attn to the K concepts like course of dealings (and waiver via course of dealings), K interpretation against the drafter, etc.

· Most powerful argument: Art 9 does not apply

· Opposite arg: If it is in the best interests of your client (bank), u will know to apply the UCC; BANKS are who wrote the UCC why wouldn’t they know how to apply it and what the definitions are.

· Security agreement – makes rights in collateral effective against the debtor. Has no impact on 3rd pp’s

· UCC1 Financing Stmt – makes rights in collateral effective against 3rd pp’s

· when bar exam emphasizes that pp failed to do smth, there is usually an alternative way to fix the problem)

Attachment problem:

Jimenez arranged to borrow $500 from Smith in a secured transaction in Chicago. Smith asked Jimenez to sign the following document: I, Jimenez , hereby grant Smith a security interest in my 1999 Bass Masters bass boat to secure repayment of a loan made by him to me today. Jimenez originally refused, but he later sent Smith an email containing the text of the document. Jimenez did not write his name at the end of the email, however. Upon receipt of the email, Smith delivered the $500 to Jimenez . If Jimenez defaulted on the loan, could he argue that Smith has no security interest in the boat on any of the following grounds: a) no signed security agreement; b) no witnesses or notary signatures; c) no info about loan terms?

A. Is this a secured trxn?

1. Was there attachment? (Assmt 8)

a. Formalities (9-203(b))

1. Value given for the collat? (assumption: creditor gives value)

i. in return for any consideration sufficient to support a simple K.

ii. As security for pre-existing claim (past consideration ok)

iii. Dispersion of funds doesn’t have to be immediate

2. Does Debtor have property rights in collateral?

i. own, lease (but nemo dat), bona fide purchasers take free&clear

ii. i.e. owner of a trademark license (limited int, bur sufficient)

3. Is there a proper written Security Agreement? (or does SP have possession of the collateral?)

i. Did debtor authenticate the agrmt?

a. Generally signature but electronic authentication ok

ii. Does Sec. Agrmt contain description of collateral?

a. must only reasonably ID what is described; purpose-to enable interested pps to ID collat 9-108.

b. Category, terms of art =OK

c. Cts would usually give Art9 meaning to terms

d. Any method of description is fine as long as it is not confusing. §9-108(b).

e. BUT, if the collat is consumer goods, commercial tort claims, consumer securities accts, or consumer commodity acct, the collateral must be described more specifically. §9-108(e), In. Re. Shirel:

i. The phrase “all merchandise” on the receipt is . . . too liberal, too imprecise, and is not a description. . . . It does not set forth a graphic or detailed account of the purported collateral.” A “sufficient description might have been a refrigerator”

f. Can’t describe as “All he’s got” – not specific enough. §9-108(c) (although it IS ok for fin stmt)

g. Error in description – NOT fatal as long as smth eles in the agrmt adequately describes the collat 9-108, Commt 2

h. Blank description at time of debtor’s signing: cts divided on validity of the security agrmt

vi. Are there any impediments to SI’s attachment to proceeds?

a. Are proceeds commingled?

i. Put together with identical noncollateral, so can’t tell which is actually which;

ii. But, if can tell which is ­legally which, then ok

iii. When commingled fund contains prop of multiple SPs , each SP gets value proportionate to their contribution relative to the balance in the fund (or value of the prop) at the time of commingling. §9-336(f)(2) (p.174)

b. Are proceeds identifiable?

i. Dollars=fungible good; just representation of purchasing power

ii. Transferee of money takes the money free of a security interest, unless acts in collusion (9-332)

iii. Tracing mechanisms:

1. FIFO: First In – First Out

1. The first $$ in the bowl will be on the bottom; last $$ in will be on top. We take out first $$ first – from the bottom.

2. Most freq. applied in real world

2. Lowest Intermediate Balance Rule

1. We don’t care much about this one

2. The proceeds of the disposition of collat remain in a commingled acct as long as the acct balance is equal to or exceeds the amt of the proceeds. – Oriental Rug

3. Debtor is presumed to spend first from his own funds; what remains is proceeds

4. Amt of collat $$ remaining in acct after deposit of proceeds and subsequent trxns is the lowest bal of all funds in the acct from time of dep to completion of trxns (ex p173)

Solution: take SI in collateral, require that debtor deposits all proceeds of collateral disposition into segregated bank acct, prohibit debtor from depositing nonproceeds into